Economy grows 4.1%, the fastest pace since 2014

WASHINGTON - U.S. economic growth jumped in the second quarter, a boost for President Donald Trump and Republicans as they seek to make a strong economy a key part of their campaign message to voters heading into November's midterm elections. But...

Written By

Washington Post
Jul 27th 2018 - 7pm.

Share

Soybeans are unloaded at dusk during harvest in Buda, Illinois, on Sept. 29, 2017. Bloomberg photo by Daniel Acker.

WASHINGTON - U.S. economic growth jumped in the second quarter, a boost for President Donald Trump and Republicans as they seek to make a strong economy a key part of their campaign message to voters heading into November's midterm elections. But economists cautioned that the higher growth is probably a blip.

The economy expanded at an annualized rate of4.1 percent from April to June, the fastest growth since the third quarter of 2014 and a sharp jump from the first three months of the year, when the economy grew at a tepid 2.2 percent rate, according to the Commerce Department.

"We're going to get a lot higher than these numbers and these are great numbers," Trump said, flanked by his economic team. "We are now on track to hit an average GDP annual growth of over 3 percent and it could be substantially over 3 percent."

Most independent economists say this quarter's growth was juiced by stimulus from the trillion-dollar tax cut and a one-time rush by foreign companies to stock up on U.S. goods before Trump's trade war escalated and tariffs kicked in on many products. Consumer spending was also solid.

But the widespread expectation is that growth will be significantly lower in the third and fourth quarters, probably falling short of Trump's 3 percent goal for the year.

-- Story continues below poll --

"The bottom line takeaway is that this growth is not sustainable and it will slow in the second half of the year," said Lakshman Achuthan, co-founder of the Economic Cycle Research Institute. "President Trump should celebrate this number because it is going to ease from here."

The federal government will release its initial estimate of third quarter growth Oct. 26, just 11 days before voters go to the polls, making it a key test of whether high growth appears to be sustainable.

"Trump has to be careful not to overhype this. There are still areas of the country that have not fully come back and that's Trump's constituency," said Greg Valliere, chief global strategist at Horizon Investments. "Wage growth has been anemic."

Although many economists warn that Trump's trade war will hurt U.S. growth, they say it temporarily boosted growth in the spring as foreign firms rushed to make purchases before the tariffs took effect. Exports added more than a percentage point to growth, something that hasn't happened in years and is unlikely to repeat.

Soybean exports exploded in the second quarter, as customers in several countries scrambled to snatch up supplies before new foreign taxes on U.S. soybeans went into effect, part of a broad retaliation against Trump's tariffs on a range of foreign products.

Economists expect the ongoing trade war to curtail growth later this year as foreign companies buy less from the United States.

Trump said the higher growth will carry on.

"These numbers are very, very sustainable," he said Friday. "This isn't a one-time shot."

The Trump administration has repeatedly predicted growth will be 3 percent a year for years to come, a projection most mainstream economists see as overly optimistic.

The Federal Reserve predicts annual growth will be 2.8 percent this year, fall back to 2.4 percent in 2019, and drop to 2 percent in 2020 as the stimulus from the tax cuts and added government spending fade.

Trump cast the growth under his administration as far stronger than what occurred under Barack Obama or George W. Bush, but the data does not back that up.

"Over the last 12 months, the economy has grown by 2.8 percent, which is a bit better than it has done recently, but is in no way the strongest growth during this expansion," said Paul Ashworth, chief U.S. economist at Capital Economics. The U.S. economy grew by 2.9 percent in 2015 and 2006, and more than 3 percent in 2004 and 2005.

Economists say the encouraging part of Friday's report is that the fiscal stimulus does appear to be driving more Americans to buy things, as expected.

"Trump deserves some credit. It's unmistakable the tax bill and regulatory changes fed into this," said Doug Holtz-Eakin, a Republican and former director of the Congressional Budget Office.

Personal consumption was strong in the second quarter, probably aided by the reduction in taxes for many Americans and the increase in optimism about the economy, especially among Republicans.

"While we always expected a bounce back in consumption, it was more powerful than anticipated and speaks to the impact of an increasingly tight labor market and strong job growth on consumer income and household's confidence," said Brian Coulton, chief economist at the ratings agency Fitch.

Business investment in equipment and structures was also positive, although the lion's share of the growth was coming from Americans opening their wallets. A bump in federal government spending also added to the pickup in growth this spring as Congress approved additional money for the military and domestic programs.

But many economists expect economic growth to slow.

"Growth is likely peaking," said Bricklin Dwyer, senior U.S. economist at BNP Paribas. "In our forecasts, the second quarter marks a high watermark for growth."

This article was written by Heather Long, a reporter for The Washington Post.

Soybeans are unloaded at dusk during harvest in Buda, Illinois, on Sept. 29, 2017. Bloomberg photo by Daniel Acker.